Türkiye is recovering from some historic lows – and with a new economic team.
For the better part of a decade, Turkey was hardly a hot spot for investors. Since a coup attempt in 2016, when the country lost its sovereign investment rating, erratic policies – especially monetary – and a string of short-term appointments at the central bank have combined to keep foreign money on the sidelines.
The Turkish lira has lost about 80% of its value against the US dollar over the past five years, hitting an all-time low of more than 30 to the dollar in January. Inflation remains high, around 65%, with the current account at an alarming 4–5% of GDP.
However, those who wrote Turkey off after last May’s presidential elections, which saw Recep Tayyip Erdogan return for a third five-year term as president, have so far been proven wrong.
In February, the first $500 million bond offering by the Turkey Wealth Fund (TWF) attracted orders totaling about $7 billion, suggesting the country will be active in bond markets this year; About $10 billion is expected to be issued this year, matching the total in 2023. TWF owns shares in some of Turkey’s leading companies, including Turkish Airlines, Borsa Istanbul and local energy giant Botas, leading observers to expect further flotations, especially as the five-year bond yield fell to 8.3%, below target higher. 9%. Turkish five-year dollar bonds are currently trading at a yield of around 7.6%, which is competitive for an emerging market.
Tourism hit record arrivals of nearly 50 million visitors last year, up 10% from 2022, and tourism revenues rose 17% to $54 billion. The auto industry recorded record export revenues of nearly $2.8 billion in January. Both were good news for the current account deficit.
Fatih Karahan, the new governor of the Central Bank of the Republic of Turkey, has shown greater determination than his predecessor in containing inflation. Interest rates are now 45%, down from 8.5% nine months ago, and a complex web of unorthodox financial rules is slowly being unraveled. Turkey watchers were also reassured that the change of governor – the seventh since 2016 – was not the result of the president’s resignation; Karakhan’s predecessor resigned for a number of reasons, including personal ones.
Analysts say the credible team of Karahan and Finance Minister Mehmet Simsek, appointed after last year’s elections, has helped change Turkey’s prospects. Simsek, who previously served as deputy prime minister and previously worked as an analyst at Merrill Lynch, is seen as a policymaker and his presence has reassured markets.
“Turkey had no choice but to return to rationality,” Erich Arispe, Turkey analyst at Fitch Ratings, said of the new team. “This time last year our sovereign rating was B with a negative outlook; now it’s B with a stable result.” However, he warns that some clouds are still on the horizon.
“The big question is how durable the policy adjustment will be and how much policy space there is to tighten monetary and fiscal policy,” Arizpe said, although policymakers insist they will do everything possible to bring inflation down. The hit to economic growth, which is expected to fall to 2.5% this year from 4.5% in 2023 when the economy was buoyed by election spending, will be significant if inflation is brought down significantly.
Investments are growing
Early signs are that monetary tightening is working, but some analysts believe restoring balance will take longer than many expect.
“Fourth-quarter GDP data showed that private spending accelerated despite an increasingly restrictive policy stance,” ING economist Muhammet Mercan and emerging markets strategist James Wilson told clients in February, “while leading indicators point to further GDP acceleration in the first quarter of this year. This means we still have a long way to go.”
The good news is that this continued growth is largely driven by strong investment, with the engineering and construction sectors looking healthy. The planned construction of four new airports, a new bullet train that would connect Istanbul with Ankara in just 80 minutes by 2035, and investments worth 210 billion Turkish lira ($6.5 billion) in the southern city of Mersin after the construction of the first in Turkey nuclear power plant. The nuclear power plant is there, everything suggests that Erdogan has not lost his passion for large infrastructure projects.
Most analysts remain optimistic about the impact of a return to orthodoxy and higher interest rates for the private sector, as well as the depreciating lira, which has fallen 40% since last year’s election.
The European Bank for Reconstruction and Development “has been working here for 15 years and we feel [Turkey] is dynamic and very resilient,” says Rafik Selim, lead regional economist at the EBRD in Istanbul. The bank invested a record 2.5 billion euros ($2.7 billion) in Turkey last year, including amounts sent in response to the February earthquake as well as significant commitments to green projects, bringing its total investment to 19.5 billion euros in 440 projects, making Turkey the EBRD’s largest bank. country of operation.
“The private sector and SMEs will be key drivers of growth,” says Selim, “as Turkey takes advantage of its large domestic market and large opportunities near abroad, which have become more attractive due to its close long-term relationship with the EU. »
Turkey has made progress in investing in human capital, Selim notes, especially in the less developed eastern part of the country, as well as in digital transformation and renewable energy. Significant investments in solar and wind power will contribute to long-term sustainability and improved energy security, which is key for a country not blessed with abundant sources of fossil fuels.
In March, the government unveiled a two-year, 57-point investment action plan “to facilitate and simplify legislative, administrative and judicial processes related to the investment environment,” giving priority to projects that promote digital and green transformation.
The big challenge now will be for Turkey to step up its efforts to attract foreign direct investment. In a recent speech, Burak Daglioglu, head of the Presidential Investment Council, noted that the country has attracted $262 billion in foreign investment since 2003, helping it move from a low- and middle-income country with a per capita income of about $3,000 per year to a with a high level of income. – A middle-income economy with an average value of US$13,000 per capita and foreign companies accounting for 8.4% of private sector employment.
However, difficult economic conditions in recent years have contributed to brain drain, as well as large capital flight, which amounted to about $20 billion last year. While much of this could be characterized as hot money, the pullback suggests Turkey could be doing more to attract long-term investment from abroad.
“Although FDI is positive in net terms – it was $10.6 billion last year, or about 1% of GDP – it is not as high as it was or as Turkey really needs,” warns the EBRD’s Selim, who notes that boom period Between 2005 and 2008, enthusiasm for Turkey’s then-reform path resulted in FDI accounting for approximately 3% of GDP. There are many reasons, including the Covid pandemic, the wars in Ukraine and Gaza, and the decline in global trade. “Turkey is not disconnected from what is happening in the wider region,” Selim warns.
The silver lining is that investor confidence appears to be returning. The Borsa Istanbul All-Share Index is up more than 20% in dollar terms this year, outperforming other indices, although inflation is still around 65% and real interest rates remain negative.
The positive reaction to last month’s Turkish bond issuance is another positive; the influx of foreign capital is critical. However, if confidence in the lira falls too far, observers say authorities must be prepared for all contingencies, including a widening current account deficit and unmanageable pressure on the lira deposit system, which offers people protection from exchange rate fluctuations and the current value of about 80 billion dollars. “Even during times of stress, unlike other similarly rated countries, Turkey was able to maintain market access,” Fitch’s Arispe said.
Ahead of local elections in late March, Erdogan promised voters that the focus on economic growth would return once Turkey overcomes the “difficulties” it faces in 2024. Analysts took this assurance that there would be no deviation from current orthodox monetary policy as good news. .
“Investors want stability and certainty, not least that the return to traditional economic policies will be sustainable,” says the EBRD’s Rafik.